Nortel's Bottom Sags

Citing ongoing weakness in U.S. carrier demand, Nortel Networks Corp. (NYSE/Toronto: NT) has lowered its breakeven point yet again, in what's become an ongoing effort to ride out the telecom downturn (see Nortel Lowers Outlook).

Nortel originally thought third-quarter 2002 revenues would be flat (see Nortel Falls Short in Long Haul). Now, it expects revenues to drop 10 percent. As a result, it must lower its quarterly breakeven level by 18 percent compared with last month's estimates, falling shy even of the skeptical expectations of at least one Wall Street analyst (see Nortel Still Not Slim Enough). The new level will be "below US$2.6 billion," Nortel says, from original estimates of about $3.2 billion.

To reach breakeven, Nortel must cut its workforce to a level of 35,000, down about 7,000 employees from the target it originally set for the end of the third quarter (see Nortel Falls Short in Long Haul and Nortel's World is Flat).

Nortel has cut more than 55 percent of its staff since January 2001, when it employed about 94,500 workers. Today's news brought Nortel's stock plummeting to $1.03, down $0.20 (16.26%) by early afternoon today.

Two key questions emerge: First, is this really the end of Nortel's cuts? Second, will it work?

Analysts aren't sure on either point. While many expected Nortel to lower its breakeven level, some thought it might not be as low as it's gotten (see Nortel Still Not Slim Enough).

"Going from $3.2 billion to $2.6 billion was pretty aggressive," says David Toung of McDonald Investments. "Will it be enough? I don't have a good answer for you."

"I'm not changing my outlook on the basis of a warning," says Kevin Slocum of SoundView Technology Group. "But I wish I could get inside how 35,000 is going to be better than 42,000. It's a long way from 95,000. I hope for the sake of the employees still there that it works. But who knows?"

Nortel seems stumped, too. Indeed, the news is the latest in a series of failed attempts Nortel's made to locate a breakeven it can live with. Over the past year, the company has been forced repeatedly either to offer no guidance or to correct its guidance downward mid-quarter.

At least one analyst thinks the company isn't pruning in the right places. "Nortel has cut buds, but it hasn't hacked away at the bush the way Lucent Technologies Inc. [NYSE: LU] has done," says Frank Dzubeck, president of consultancy Communications Network Architects.

Lucent, too, has cited the need to cut another 7,000 jobs (see Lucent Loses $7.9B, Plans Layoffs). But Dzubeck sees big differences in how the two companies have approached their problems over the past year. Dzubeck thinks Nortel needs to be more aggressive in looking at its asset pool and making some informed changes.

"Nortel thought it had done well to sell its access business. But that business wasn't making money anyway," he says (see Zhone Acquires Nortel's Access Gear).

And while Nortel's winning business, particularly in the voice-over-IP space, it continues to be haunted by old acquisitions (see Whatever Happened to X? page 6), Dzubeck says. Bay Networks, for instance, continues to represent a large installed base of switches and routers for Nortel. But even though that portion of Nortel's enterprise business may bring in cash, it's likely not worth the ongoing drain on resources required to maintain the installed base, he maintains.

Further, Nortel's debt situation remains in question. "[Lucent CEO] Schacht spent his whole first year just straightening out Lucent's debt," Dzubeck asserts. "That's what [Nortel CEO Frank Dunn] should have done. Nortel's debt versus cash in hand is a major problem."

Dzubeck also notes that Lucent spun out Avaya Inc. (NYSE: AV) and Agere Systems (NYSE: AGR) in a more or less timely fashion, while Nortel continues to have problems shopping its components and wireless businesses. Further, given current market conditions, it's getting less likely that Nortel will be able to fetch a good bid for its components assets (see Components Overboard!).

Clearly, it remains to be seen whether Nortel's latest changes will achieve the hoped for result.

— Mary Jander, Senior Editor, Light Reading
Page 1 / 6   >   >>
TheChief 12/4/2012 | 9:51:37 PM
re: Nortel's Bottom Sags "while Nortel continues to have problems shopping its components and wireless businesses"

Is Nortel shopping their wireless business? That seems to be one of the few business areas that is actually selling product!
jgh 12/4/2012 | 9:51:37 PM
re: Nortel's Bottom Sags In an e mail sent to the troops about the pending layoffs, fearless leader, Frank Dunn, told them not to take them PERSONALLY.
What a morale booster, what a leader. He reminds me of the French generals during WW I sending their troops to certain death in the trenches, while they sat in their HQs blaming their defeats on the lack of effort from the soldiers.
Hey Frank, what is the next number you are pulling out of your hat as to when Nortel will break even. It changes every quarter. Get rid of thew calculator and start using an abacus, it can't get be worse.Clueless is the best word to describe this illustrious leader.
papabear 12/4/2012 | 9:51:36 PM
re: Nortel's Bottom Sags Seems to me if they want to save money they should layoff about 75% of their upper management. That would get them close to where a normal and profitable company should be at.

Most of the telecom companies have too many positions/decision makers and not enough workers generating/engineering revenue producing technologies.
Chatterbox 12/4/2012 | 9:51:35 PM
re: Nortel's Bottom Sags > Seems to me if they want to save money they
should layoff about 75% of their upper management.

Don't do that! There are already too many companies reeling from an overdose of ex-Nortel execs. Don't spread the disease further!
dodo 12/4/2012 | 9:51:34 PM
re: Nortel's Bottom Sags D***ed Right,

With a lot of these VPs, SVPs and EVPs amking in the 200K and up ( Vp reporting to VP reporting to VP), they should be given the pink slips an dlet the engineers be productive for the next gen products when the market will finally pick up.

Considering the salary, compensation and benefits, we can replace a VP with 4 solid and productive engineers.

Need only 35000 employees to sustain the business and plan for the future, just implode that reverse pyramid of execs who don't know what they are pitching.
maryhadalambda 12/4/2012 | 9:51:33 PM
re: Nortel's Bottom Sags Another admonition to wear Nortel polo shirts to work while sucking down ice cream?
ccbonnet 12/4/2012 | 9:51:32 PM
re: Nortel's Bottom Sags 'another 7000' - where will it come from? VPs AVPs etc will form a few 100, what about the rest?

What will you do if you're asked to cut?
ironman 12/4/2012 | 9:51:32 PM
re: Nortel's Bottom Sags Lets not forget that Nortel is a great marketing company; problem is that there is nothing out there to market! Having to remove 7000 more from the telecom manufacturers roster is not a shiny day people.. This is nothing to poke fun at. Exec's, even at Nortel get the axe just like engineers, temp's, admin, etc. This is but yet another dark day in the business. Nortel has provided great technology in its day. Just because its product lines are not the sexiest does mean it won't rebound. Its not if, but when.
BobbyMax 12/4/2012 | 9:51:26 PM
re: Nortel's Bottom Sags Nortels downfall is directly attributable to its buyinbg trashy companies. The second reason for its downfall is the appoinment of incompetent managers all over the company.

Any company that acquires companies such as Alteon,Bay Networks and other junky companies is bound to suffer a setback. Nortel's exectives were not competent to analyze the raw data on marketing, market projections, technology, and suitability of the products.

Nortel has meshed up all segments of its business including wireless.
lorent 12/4/2012 | 9:51:25 PM
re: Nortel's Bottom Sags Damn straight.

Worldcom was obviously a large division of Nortel. Tyco was part of the optical long haul group. I'm sure that they even had in Enron...

If it wasn't for their infiltration of managers into Lucent, Alcatel and Marconi those companies would be doing great.

Bobby -- you're talking out your ass again.

Yes they did pay too much for Xros, Qtera, et all but don't forget all that did was dilute the existing stock. 5 or 7 or 9 billion dollars sounds like a lot (well it IS) but don't forget that only represented 5% of the total market cap of Nortel. All their crappy acquisitions only diluted the market cap by 20%. Plus -- why were they making those acquisitions? Because their customers were telling them to. The damage done to companies by telecom CTO's cannot be overestimated.

Lastly Nortel did make the odd good acqusition -- $350M for Cambrian was a steal for example. Not to stick up for Nortel. Far from it. The point is we were ALL drinking the kool-aid.
Page 1 / 6   >   >>
Sign In